Silver, The Devil’s Metal

Gold up, markets down. The Dow lost 113 points overnight while gold tacked on about 10 bucks in the US session. Weird.

You probably can’t read too much into the price action…yet. But you do sense a slight shift might be taking place. In our Sound Money. Sound Investments newsletter we’ve been writing about how markets take months to ‘top out’. Sharp and convincing rebounds follow sharp sell-offs, dragging previously sceptical bears into the market because it’s ‘going up’.

But the rally becomes exhausted, and the bears again look to take control. Of course, you can’t really argue that the bears have been in control for a while now. As we mentioned yesterday, there was a short, sharp correction during May and June, but the bulls quickly arrested that decline.

What you’re seeing basically is an arm wrestle between the bulls that believe abundant liquidity trumps all, and the bears that point to a slowing economy and major structural problems in China as reason to expect lower prices in the future.

Over the past month or so, the bulls have been winning the arm wrestle, but the bears might be about to regain control.

And as for gold, well, it still hasn’t broken out above the important US$1,340/$1,350 area. But there are some positive signs that it soon might…

One of those signs is silver, which has been on a tear lately. That’s not exactly saying much, as silver has endured a horrible past few years, falling by around 60%.

But it’s looking increasingly like the bottom is in. Silver still has much work to do before it’s out of the woods, but its recent performance is just what is needed to get it going.

Source: StockCharts

The reason why this is bullish for gold lies in the GSR — the gold/silver ratio. Traders look at this ratio to get some indication of money flows into the precious metals sector. When the ratio rises, it indicates a preference for gold over silver. When it declines, it’s a signal that traders prefer silver over gold.

Traders like it when the GSR trends lower because it’s a sign that speculative money is flowing back into the precious metals sector. That brings more players and more buying power into the market…which sends prices higher.

So there are some bullish signs emerging for gold and silver, although as we pointed out earlier this week prices are set in the ‘paper’, not physical markets.

And keep in mind silver is far more speculative than gold. It might be called a precious metal, but it’s not something central banks accumulate as a wealth reserve asset. It’s a hybrid industrial/monetary asset, and its vicious fluctuations reflect the markets’ often changing views of what silver actually is. Traders don’t call it the ‘Devil’s Metal’ for nothing.

Silver used to be an official monetary asset, but Britain and the US set about ‘demonetising’ silver in the late 1800’s, removing it from playing any sort of role in the financial system.

They then set about doing the same thing in India and China. Britain achieved this in India when India was a part of the British Empire. The US achieved it in China by enacting the Silver Purchase Act in 1934.

The US was trying to bring about inflation and wanted to push the price of silver up. The Act was an early form of quantitative easing and instructed the US Treasury to buy silver until the price reached US$1.29.

This created worldwide demand for silver…and completely screwed the Chinese economy. That’s because China was on a silver standard at the time. So anyone with silver-backed debts in China saw the value of their debts rise as the price of silver rose.

It caused havoc in the Chinese economy and soon after forced the country off the silver standard. Chinese citizens had to hand their silver in for a new fiat currency and before long China suffered from money printing and rampant inflation.

It led to the overthrow of the nationalist government in 1949 and the rise of Mao Zedong and socialism in China. The rest is history…

If you look hard enough, you can generally trace history’s biggest monsters back to some sort of monetary shenanigans.

Money, and a society’s management of it, are a mirror image. It should come as no surprise that morals and social mores in Victorian times (during the classical gold standard) were far more conservative than they are now during the late US dollar standard.

Money might be getting more complex, but it doesn’t mean it’s getting better. And whether money is physical gold or just an electronic equivalent like Bitcoin, it doesn’t change the essence of it.

That is, a society needs money to act as a reliable unit of account and unit of exchange. It also should at least be a decent short term store of wealth, so we can save it for later use without being worried about it losing its value. We need to trust that what we are getting for our labour or the employment of our capital is a sound measurement.

But sadly, in the age of QE and unconventional central banking being bowed down to by a compliant society, modern money is fast losing the trust and reliance that people instinctively put in it.

This process takes time. Monetary systems don’t break down easily. And what one person sees coming many years out, another doesn’t see until it’s in front of their nose.

We’re heading in that direction now. Which is why we’ve decided to loosely theme our conference next year on money…digital, paper, hard…whatever. It should make for a very interesting few days of discussion.

Meanwhile, we just checked, and the old/new form of money, ‘paper gold‘, just popped up through US$1,340 in Asian trade. It’s knocking on the door of much higher prices.

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“Money might be getting more complex, but it doesn’t mean it’s getting better. And whether money is physical gold or just an electronic equivalent like Bitcoin, it doesn’t change the essence of it. “That is, a society needs money to act as a reliable unit of account and unit of exchange.” i agree. money ain’t necessarily getting better. but, to me, gold and silver are not money for “society”. they are money for a free individual. a Person needs REAL money to protect his/her political birthrights as well as to have and to hold–i.e., something to work for which does… Read more »

While in general I would agree, I have to disagree about the de-monetzation of silver’s occurrence in the late 19’th century.
The US continued to mint/use silver coins up until 1970.
The US also re-monetized silver in the mid 20’th century under Kennedy – with executive order 11110.

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